Standing Committee A

[Mr. EdwardO'Hara in the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Dawn Primarolo: I beg to move,
That during proceedings on the Finance (No. 2) Bill (except Clauses 13 to 15, 26, 61, 91 and 106, Schedule 14, and new Clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984), the Committee do meet at half-past Ten o'clock and half-past Four o'clock on Tuesdays, and five minutes past Nine o'clock and half-past Four o'clock on Tuesdays, and five minutes past Nine o'clock and a quarter to Two o'clock on Thursdays, when the House is sitting.
On behalf of the Committee, Mr. O’Hara, I warmly welcome you and your co-Chairmen, Sir John andMr. Benton. You are all experienced and knowledgeable, and I am sure that you will keep us in order. We look forward to your expertise and are confident that our deliberations will be both thorough and relevant. I extend a warm welcome to the hon. Member for Chipping Barnet (Mrs. Villiers) who will lead for the Opposition in Committee and to the members of her team, the hon. Members for Rayleigh (Mr. Francois) and for Fareham (Mr. Hoban), and those who support them.
I welcome Mr. Cranmer, the Clerk to the Committee. I am pleased that we shall benefit again from his significant experience of Finance Bills. I also welcome the Hansard staff, as I do the hon. Member for Falmouth and Camborne (Julia Goldsworthy) and her Liberal Democrat colleagues. I am pleased to see the hon. Member for Dundee, East (Stewart Hosie). He has been assiduous on the Floor of the House. No doubt he will welcome his happy and long stint in Committee, but perhaps he can tell me about that at the end of our proceedings.
I will be supported in Committee by the Financial Secretary and the newly appointed Economic Secretary, who is truly looking forward to being here every Tuesday and Thursday—morning and afternoon. That will come as news to him. Given that my hon. Friends will follow our proceedings in great detail, I hope that they will not be disappointed. The good news is that we have only one Finance Bill this year, not two—or three Bills, as we had last year. I look forward to our debates in the coming weeks. I hope that we can conduct ourselves in an appropriate manner, being pressing in debate, but always remaining civil. We shall need to behave in such a way to get through the proceedings and for the sake of our sanity.

Theresa Villiers: I echo the Paymaster General’s welcome to you,Mr. O’Hara, and to your co-Chairmen. My team and I also look forward to working with you, as we do with the right hon. Lady and her team in the constructive and co-operative manner that she has just mentioned. Obviously, we shall make it clear when we disagree with the Government on certain points, but we hope in many instances to table amendments that go more towards ascertaining the meaning of the Bill and teasing out uncertainties, rather than necessarily pushing for a Division and a change in the published Bill.
I also echo the Paymaster General’s welcome to the hon. Members for Falmouth and Camborne and for Dundee, East. I particularly welcome Back Benchers. It is not always considered to be a great privilege to discuss the Finance Bill in Committee, but although it may prove to be a fairly long and gruelling experience, we are well aware of the importance of the task ahead of us. Indeed, as my hon. Friend Member for Rayleigh said a few weeks ago, in the past there has almost been an outbreak of Stockholm syndrome in the Committee as matters become a little eccentric after several weeks discussing the details of United Kingdom financial legislation. With those words, I welcome the sittings motion.

Colin Breed: I, too, welcome you to the Chair, Mr. O’Hara. I think that my hon. Friend the Member for Falmouth and Camborne has written to you, apologising for not being able to be here this morning due to a prior speaking engagement that she could not get out of.
It is many years since I had the great pleasure of sitting on the Finance Bill Committee and, from my memories, I was not certain that I wanted to renew that experience immediately. However, I look forward to working with Committee members co-operatively on this Bill to try to tease out of the Government some of the important issues that will affect hon. Members, and our constituents, in the months and years to come.

Question put and agreed to.

Edward O'Hara: Before we proceed, I have several announcements to make. The Ways and Means and money resolutions agreed by the House and on which the Bill is founded are available in the Room. There has, apparently, been a software bug, which means that the contents pages of the Bill as printed are slightly inaccurate. If hon. Members have an inaccurate version, they may obtain new contents pages, printed separately on green paper, which are available in the Room.
In view of the resolutions of the House relating to the declaration of interests, right hon. and hon. Members are required to declare relevant interests when they table amendments as well as when they speak to them. Copies of the relevant rules are available from the Clerk.
Again, as usual with the Finance Bill, because of the quantity of paperwork, boxes are available to store papers between sittings. Hon. Members who make use of that facility should note that the filing cabinet containing the boxes will be locked when the Committee is not sitting.
The Vote Office would be very grateful if we could try not to mislay copies of the Budget documents, for the obvious reason that supplies are short and, if we keep losing them, it may be embarrassed in finding replacements.
I should, as usual, like to draw attention to the fact that adequate notice must be given of amendments. Neither my co-Chairmen nor I will, as a rule, call any standard amendments, including any starred amendments that may be reached during an afternoon sitting.
Finally, please switch off all mobile phones.

Resolved,
That the Order in which proceedings in Standing Committee on the Finance (No. 2) Bill are to be taken shall be: Clauses 1 to 12, Clauses 16 to 25, Clause 27, Schedule 1, Clause 28, Schedule 2, Clause 29, Schedule 3, Clauses 20 to 37, Schedule 4, Clauses 38 to 42, Schedule 5, Clauses 43 to 60, Clauses 62 to 76, Schedule 6, Clauses 77 to 79, Schedule 7, Clauses 80 and 81, Schedules 8and 9, Clause 82, Schedule 10, Clauses 83 to 86, Schedule 11, Clauses 87 and 88, Schedule 12, Clause 89, Schedule 13,Clause 90, Clauses 92 to 102, Schedule 15, Clauses 103 and 104, Schedule 16, Clause 105, Clauses 107 to 134, Schedule 17, Clauses 135 to 147, Schedule 18, Clauses 148 to 155, Schedule 19, Clauses 156 and 157, Schedule 20, Clauses 158 and 159, Schedule 21, Clauses 160 and 161, Schedule 22, Clause 162, Schedule 23, Clauses 163 and 164, Schedule 24, Clause 165, Schedule 25, Clauses 166 to 178, new Clauses (other than new Clausesrelating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984), new Schedules, Clause 179, Schedule 26, Clauses 180 and 181.—[Dawn Primarolo.]

Clause 1

Rates of tobacco products duty

Question proposed, That the clause stand part of the Bill.

Edward O'Hara: With this it will be convenient to discuss the following: New clause 1—Review of tobacco products duty—
‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of tobacco products duty before1st March 2007 and will consult with organisations which have a special interest in tobacco products duty before publishing that review.'.
New clause 2—Review of hydrocarbon oil duties—
‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of hydrocarbon oil duties before1st March 2007 and will consult with organisations which have a special interest in hydrocarbon oil duties before publishing that review.'.
New clause 3—Review of rates of gaming duty—
‘The Chancellor of the Exchequer will publish a review in relation to rates of gaming before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.
New clause 4—Review of amusement machines—
‘The Chancellor of the Exchequer will publish a review in relation to classes of assessment machine and rates of duty before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.
I should explain that the purpose of grouping the clause with the proposed new clauses is to enable the Committee to debate the proposal for a Government review of the various duties referred to. We should not anticipate debate on subsequent clauses. I trust that that is understood.

John Healey: I welcome you to the Chair, Mr. O’Hara. It is a pleasure to serve under your chairmanship again. In my experience you Chair proceedings with a firm and fair hand and I know that you will continue to do so. I am grateful to you for the guidance that you have given us on the grouping of new clauses to be discussed as part of the clause stand part debate.
I shall mention my views on the new clauses later, but first let me deal with clause 1, which increases the rate of duty on cigarettes, cigars, hand-rolling tobacco and other smoking and chewing tobacco products. It does so in line with inflation, therefore increasing the typical price of cigarettes by 9p, including VAT, and did so with effect from 6 pm on Budget day, 22 March 2006.
The Committee is aware that smoking kills more than 100,000 people in this country each year. It is the greatest cause of preventable illness and premature death in this country. So the duty increase, in line with inflation, will help to maintain the real price of tobacco, the contribution to Government revenues and the price support—a level of pricing that encourages people to smoke less or to quit, and discourages children or young people from taking up the habit in the first place.
Duty rates form an important part of our strategy to drive down the level of smoking in this country and of our target to reduce the prevalence or level of smoking to 21 per cent. by 2010. Those measures run alongside important provisions that we are making through the NHS to support those who want to quit and also the public places smoking ban due to come into effect in the summer of next year. So the duty increase continues a well-established policy—a twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of cheap smuggled tobacco. That will help to reduce smoking, and lower the financial, social, personal and health costs associated with it.
On the new clauses, I welcome the interest of the hon. Member for Wycombe (Mr. Goodman) in evidence-based tax policy decisions. I say to him and his colleagues on the Opposition Front Bench, we publish more information relevant to their new clauses than they might realise. In fact, we might publish more than they care to read. In relation to new clause 1 on tobacco, I gathered up on my way here a selection—not an exhaustive list—of the documents that we have published in the last 18 months.
“The Demand for Tobacco Products in the UK”, published in December 2004, is a detailed model for the elasticities of tobacco demand. The pre-Budget report 2004 included an update on our strategic approach to measuring and tackling indirect tax losses, including from tobacco, and in late 2004 we published an analysis of, and plans to deal with, counterfeit cigarettes. I have brought also a copy of a quarterly publication that includes a tobacco fact sheet—hon. Members might or might not be aware of it—with data on tobacco clearances and duty, and on the state of the market. As I said, it is a quarterly publication and the hon. Gentleman might care to pick up the next one, which is out later this month.
In December 2005, as part of last year’s pre-Budget report, we published an analysis of indirect tax losses which took into account the impact of duty. This year we have published a detailed fresh analysis of how we will reinforce our strategies for tackling tobacco fraud and smuggling. Furthermore, of course, there are the Budget notices—once again I have brought only one copy with me—published alongside the Budget, which are legally binding, and which we attempted to write in plain English, setting out the changes announced in each Budget, how they impact, and on whom.
We make a considerable effort to assess the impact of tax regimes on specific industries and the wider economy. We meet regularly with and take into account the views of organisations with special interests. We frequently reassess the general design or specific aspects of the operation of areas of the tax system, and when we do so we run a public, open consultation process.
In each year’s pre-Budget report and Budget, we give updates on tax and wider policy, and each year we publish a pre-Budget report for the excise regimes—an analysis of the tax gap, the losses and the impact of the rates. Ours was the first finance Ministry to make such a systematic analysis of the operation of the tax system and the first to put in place comprehensive strategies for reducing the tax gap, and I believe that we are still the only Government to do so. In those circumstances, when we come to decide on whether the proposed new clauses should become part of the Bill, I hope that hon. Members of all parties will bear in mind the quantity and the quality of what we already produce.

Paul Goodman: It is a pleasure to see you in the Chair, Mr. O’Hara. Unlike the Financial Secretary, I have not had the pleasure of serving under your chairmanship before. Although I am sure that, in the course of these proceedings, the Financial Secretary and I will not agree on everything, he was right to pay tribute to your chairmanship, and I look forward to your guiding us in our transition through today’s clauses in a dignified, orderly and efficient manner.
The clause that we are considering invites us to approve the tax rise proposed in the Chancellor’s Budget. As the hon. Gentleman said, new clause 1 would have the effect of compelling the Chancellor to publish a review in relation to the effectiveness of tobacco duties. You, Mr. O’Hara, will be pleased to know that I do not intend to discuss the proposed review in detail, and the hon. Gentleman will be pleased to hear that too. I want to refer to what he said about the quantity and quality of the information already published by the Treasury; he was right to draw attention to that. The proposed new clause seeks to draw an assessment from him of how all those documents come together in terms of the effectiveness of the Government’s strategy with regard to the duty.
We need to explore the effectiveness of that strategy in some detail. Any tax needs to be effective; it must achieve its aims. The Financial Secretary made it clear that the aim is to discourage smoking. That is an aim that we share. However, he did not mention the other aim of the clause, which is to raise revenue for the Exchequer—[Interruption.] He did. I apologise to him. We are covered so far as aims go.
The Financial Secretary will be mindful of that great law in relation to taxation and many other matters, the law of unintended consequences, as well as of the effect that raising a tax beyond a certain point might have on expected consequences, namely that it might not discourage the behaviour that it seeks to discourage. If raised beyond a certain point, it might raise less revenue than it would if it were not increased or if it were decreased. Raising it beyond a certain point could cause such unexpected consequences as evasion, in this case tobacco smuggling, which we shall discuss in more detail when we debate clause 2.
At present, according to the Tobacco Manufacturers Association—which would like duties to be frozen, not unusually—smuggling increased between 2002 and 2004, the last few years for which the organisation has figures, resulting in a rise in revenue loss from£2.6 billion to £2.9 billion. The Minister will doubtless point this out when he replies, so I shall point it out for him: it is true that the cross-border element has fallen from £1.4 billion to £1.3 billion. However, when both figures are added together, the result is a rise from£4 billion to £4.2 billion. The Tobacco Manufacturers Association suggests that those developments threaten the Government’s smuggling targets. I am sure that the Minister will want to respond to that point too.
According to a Gallaher monthly pack swap survey, the consumption of counterfeits has risen slightly, from 2.4 per cent. to 2.8 per cent. of total consumption. It is worth standing back from the figures for a moment and looking at them in context. According to the TMA, cigarette prices in the UK are already the highest in Europe, and the UK’s excise duty burden is the highest in the EU. The rising number of freight movements and visits within the EU, good things in themselves, naturally increases opportunities for smuggling. There has also been a significant rise in UK consumption of hand-rolling tobacco.

Brooks Newmark: My hon. Friend makes a good point about the influence of duty increases on smuggling, but I should be most interested to hear the Minister’s response to the point made earlier about the analysis of elasticity. What is the Government’s analysis of the effect on reducing smoking of each 1p increase in duty? It would be extremely interesting to hear that.

Paul Goodman: My hon. Friend has conveyed his request to the Financial Secretary through me, so I shall not repeat it. We look forward to hearing the answer.
I return to hand-rolling tobacco consumption. In 1995, £5.1 billion-worth of hand-rolling tobacco was consumed. Last year, £10.8 billion-worth was consumed. The amount of non-UK-produced hand-rolling tobacco in particular has increased every year since 1995.
The Minister works on enforcement with the Tobacco Alliance, which represents some 17,000 independent UK retailers. I know that he sees the alliance regularly, and I am sure that he will join me in paying tribute to its work. The Tobacco Alliance is seriously concerned about the effect of smuggling on small shopkeepers’ livelihoods and on public health, given smugglers’ greater propensity to sell tobacco, particularly counterfeit tobacco, to children.
Last August, 83 per cent. of retailers surveyed by the alliance reported that smuggling had decreased their sales, 27 per cent. had cut staff—those are the two most serious figures—and 21 per cent. said that they were considering closing. Some 71 per cent. were aware of tobacco smuggling in their area, 35 per cent. were aware of counterfeit tobacco smuggling and 20 per cent. knew of smugglers who supplied underage smokers. A total of 90 per cent. thought that the Government were not doing enough to help retailers affected by smuggling—I suppose that when surveyed people always tend to think that the Government are not doing enough, but there it is—while 74 per cent. thought, perhaps unsurprisingly, that the Government should reduce or freeze taxes.
Yesterday, I received a letter from Ken Patel, a Leicester retailer and the chair of Retailers Against Smuggling, the campaigning arm of the Tobacco Alliance. The Financial Secretary will know him. What he wrote is important:
“Tobacco sales account for a large proportion of our footfall and when a customer comes in to buy their cigarettes, the chances are they will pick up something else, like a pint of milk or a newspaper at the same time. We shopkeepers are therefore losing out twice. We simply cannot compete with the smugglers who can undercut our prices by half.
Let me put to you a hypothetical situation: say I was the European head of a smuggling organisation who had to report in to my boss, the worldwide head of a smuggling organisation who wants profits and wants them fast. Where am I going to focus on to get the most profits as quickly as possible? Clearly the solution would be to focus on the country where I can undercut shop prices but still make the most profit—the place with the highest tobacco levels in the EU—the United Kingdom.
On top of that, the best thing about the situation”—
he is writing from the vantage of the imagined head of a smuggling organisation—
“is that the Government in Britain is going to help me out, by increasing tax every year and encouraging more people who smoke to buy their cigarettes from my street-sellers.
Let’s take another hypothetical situation: that I smoke 20 cigarettes a day. I enjoy it and it is part of my life. I am not going to stop just because my pack has gone up over the £5 threshold. It could go up over the £6 threshold and it would not make me stop smoking. It wouldn’t matter that much because I know that if the cost of a pack of legitimate goes over a price barrier I might have subconsciously set, then I can go and get some smuggled from the street corner. It’s going to be quite a while before the cost of a pack of smuggled reaches that subconscious level I have set for a legitimate pack.”
I will not read the rest of Mr Patel’s remarks nor will I explore, in the manner of the Hutton inquiry, subconscious motives. However, I wanted to draw the letter to the attention of the Committee because it represents the views of 17,000 retailers and Mr Patel makes some important points.
It is worth standing back from those figures for a few moments to consider which organisations are making profits from tobacco smuggling. Ministers do not know and cannot be expected to know all the organisations involved, but they do know, as the rest of us do, the names of some of the organisations. When we refer to smuggling gangs, it can be assumed that they are ordinary criminal gangs. However, they do include the Provisional IRA and loyalist paramilitary groups, which is plainly a serious matter.
Two months ago, Radio 4’s “File on 4” programme reported that the IRA is linked up with other criminal gangs and is behind the smuggling of millions of pounds of contraband across the North sea. It is perhaps significant that cigarettes were among the items seized when premises of the IRA’s reputed chief of staff, Thomas “Slab” Murphy, were sealed off in March, after an operation by customs officers, detectives and soldiers from both sides of the border.
Rob Marris (Wolverhampton, South-West) (Lab) rose—

Paul Goodman: I am delighted to see the hon. Gentleman here and I am sure he will contribute enthusiastically to the debate, just as all his other colleagues will.

Rob Marris: I am grateful to the hon. Gentleman, who I know well from our time in Select Committee. Can he tell me whether he is talking to clause 2 or clause 1?

Paul Goodman: I am addressing clause 1, because as my hon. Friend the Member for Braintree said a moment ago, one of the phenomena that impacts on smuggling is price. Thus, the duties relate to price, so I am addressing clause 1. I am glad that he is following proceedings so closely that he can see that is taking place.

Gordon Banks: Will the hon. Gentleman give way?

Paul Goodman: I am very happy to give way to another hon. Member whom we also look forward to hearing from many times in Committee.

Gordon Banks: You mentioned the Northern Ireland situation? Do you not acknowledge that this year many tens of millions of cigarettes—

Edward O'Hara: Order. May we establish at the outset that remarks must be addressed through the Chair?

Gordon Banks: The hon. Gentleman mentioned the situation relating to Northern Ireland. Cannot it be accepted that tens of millions of cigarettes have been seized in Northern Ireland this year? That showsthat the Government are trying, and succeeding significantly, to get a grip on the issue.

Paul Goodman: If I deal with that point in detail, I am concerned that the hon. Member for Wolverhampton, South-West (Rob Marris) will accuse me of delving into clause 2. However, the hon. Gentleman is right; the Financial Secretary has reported progress in that field, and I am delighted, as I said earlier, that customs officers from both sides of the border were involved in the recent raid on the farm of Mr. Thomas “Slab” Murphy.
Stepping away from the issue of smuggling and the perils of becoming entangled in clause 2, we, like the Government, believe that it is right in principle to use the tax system to discourage smoking. It is also reasonable, in principle, to use taxes on tobacco to raise revenue. We also note that the consumption of tobacco continues to decline, albeit slowly, and that the Treasury has brought down revenue losses from smuggling.

Stephen Hesford: Given that the Financial Secretary indicated that the rise is in line with inflation, I am not clear what point the hon. Gentleman is making. If there is some elasticity and the rise is the result of inflation, what other increase would he make? Would it be less than inflation?

Paul Goodman: I do not know what rise, freeze or reduction my hon. Friend the Member for Tatton(Mr. Osborne) will propose when he introduces his first Budget in 2009, but I hope that the hon. Gentleman will recognise that there is a relationship between the level at which a duty is set and smuggling. If the Government were not concerned about smuggling or about the level of the increase, we would hear the first noises in Committee from the Economic Secretary to the Treasury, whom I congratulate on his promotion. I am glad that his hon. Friends are as enthusiastic about the issue as I am; doubtless he is, too.

Brooks Newmark: Is not one of my hon. Friend’s key points the fact that our tobacco price is among the highest in the European Union? That high price is driving the smuggling industry and putting many shopkeepers out of business.

Paul Goodman: My hon. Friend is right. We are considering the relationship between the high price, smuggling and counterfeit goods. That is the best answer that I can give to the hon. Member for Wirral, West (Stephen Hesford).
Before the Government Back Benchers became so enthusiastic, I was moving on to make a point in the Government’s favour. Although losses from smuggling rose last year, they fell to £4 billion in 2002-03—from £4.2 billion in the previous year and £4.3 billion in the year before that. It is at least possible to believe that HMRC will begin to reduce the figure in future years. For that reason, while we want to hear what the Financial Secretary says, we have no plans to oppose the tax rises in line with inflation that are proposed in clause 1. However, we would like him to address the questions about the rate of duty, and to tell us whether he accepts that there is a point beyond which, if the tobacco duty were raised, revenues would fall and smuggling would increase. Given the high prices and duty levels to which my hon. Friend referred, we would like the Financial Secretary to give us an indication as to the Treasury’s thinking about how close we are to that point.

Philip Dunne: I, too, would like to express my enthusiasm about serving on this Committee under your chairmanship, Mr. O’Hara, and that of Sir John Butterfill.
I declare that I have a prejudicial interest that is not shown in the Register of Members’ Interests. I am a fervent and passionate anti-smoker. If that colours my remarks on the clause, I am sure that Committee members will at least understand. I am curious about the increases in the rates of duty, because they are somewhat at odds with the Government’s stated policy. I welcome the proposed increase in line with inflation, but I am concerned. Recently, we in the House have advanced proposals banning smoking in public places on grounds of public health, and the Financial Secretary has argued thatÂ duty rates are being increased to discourage smoking on the same grounds. Why, then, are the Government limiting themselves this year to an increase in line with inflation alone?
I have done a bit of research into the increases in tobacco duty under this Government. I understand that between January 1998 and March 2006 tobacco duty has been increased from 131.9p per 20 cigarettes to 210.2p, which is a rise of 59.4 per cent. in nominal terms and an increase of 14.9 per cent. in real terms using March 2006 prices. However, we are presented with no increase in duty in real terms, despite the Government’s stated intent.
In trying to understand what may be lying behind this modest increase, I have considered the incidence of smoking under this Government. In the 2004 general household survey, published in December 2005—the one most recently available from the Office for National Statistics—table 8.6 refers to the prevalence of cigarette smoking in Great Britain between 1978 and 2004 in persons aged 16 and over. The incidence of smoking across the population as a whole has declined from 27 per cent. in 1998 to only 25 per cent. in 2004, which is a modest decline given the Government’s ambitions.
The table helpfully goes back to 1978, the period immediately before the last Conservative Government, so I should like to set the issue in context. I remind the Committee that at that point the proportion of adults smoking was 40 per cent., but that declined to 27 per cent. in 1998. That was during a period of the Conservative Government who were clearly more successful in bringing down smoking for a number of reasons. I am not claiming that tobacco duty is the sole reason why the incidence of smoking declined. None the less, the previous Government had a more successful record. I invite the Financial Secretary to comment on the elasticity of demand for cigarettes related to duty and why the Government are being so modest with this measure.

Colin Breed: The hon. Member for Ludlow(Mr. Dunne) has said much of what I was going to say about the strategy behind the rates of duty.
Duty can be lowered, frozen or raised. Raising it in line with inflation would perhaps be the minimum amount that a Chancellor could do to preserve the amount of revenue received. However, it is the Government’s desire and wish—and the wish throughout the House—for this duty to contribute to a general reduction in smoking and, let us hope, to discourage young people, in particular, from starting.
Like the hon. Gentleman, I ought to declare an interest, because I have never smoked anything. I am not certain whether that makes me anti-smoking. Nevertheless, I think that we all want to reduce smoking, because of the health effects.
Bearing in mind that the Government have, as the hon. Gentleman said, introduced with a huge amount of support in the House and the country the measure for no smoking in public places as a drive to reduce smoking generally, perhaps it was a surprise that the duty on tobacco products in the Budget was raised only in line with inflation. Paragraph 8 of the explanatory notes states:
“The estimated revenue yield from these changes is nil against an indexed base.”
I assume that that is because it has been raised only in line with inflation. However, given the Government’s proposals for driving down levels of smoking, which have been largely supported, one might have assumed that in the next year levels of smoking would reduce and that therefore fewer cigarettes would be purchased. That, in turn, would reduce the tax revenue. That might well be considered a success.
The Government could have considered combining different legislation. For instance, the Scottish Parliament has banned packs of 10 in an attempt to make certain that young people, who are one of the principal purchasers of packs of 10, are unable to buy them and therefore have to spend more money on packs of 20. The hope is that that will reduce the numbers of young people smoking. There is alsothe idea of increasing to 18 the age of purchase. So the Government could have reinforced their proposals with other measures.
As has been said, price is a main driver. As it goes up, fewer people will want or be able to purchase cigarettes. That could spur reduced consumption. Perhaps the Chancellor might have been a little more ambitious by increasing duty further, but we support the overall contention of maintaining the real value.
As has been pointed out already, the real problem is that as we drive up the price, we almost encourage continued smuggling. I am sure that we will discuss that in much greater detail during consideration of the next clause, but a year or two ago, I and other hon. Members visited a business in Belgium that dealt exclusively in what I suspected were smuggled tobacco products. The man who ran the business told me that all he needed for his business to thrive was for the Government over here to keep driving up the price of cigarettes.
Until we can get agreement on the way in which tobacco is taxed, particularly in other parts of the European Union, that problem will continue. The Government should not be deflected or bow down, but should try to stop the smuggling. Certainly, we do not want to give smugglers any encouragement, even if we are going to increase the price.

Rob Marris: To take the hon. Gentleman back a couple of sentences, is he suggesting tax harmonisation?

Colin Breed: I am not suggesting that at the moment, but it ought to be considered over time. There is smuggling from all sides in Europe and certainly there is a great deal that could be done in France, Belgium and elsewhere to prevent some of the smuggling into Britain. At the moment, there seems to be a rather laid-back effort. Of course, if other countries in Europe shared our views on the health aspects of smoking, they might be encouraged to increase their prices too. However, if we are not careful, I suspect that harmonisation would end up with us substantially reducing our duty, which I could not possibly accept. It is somewhat fanciful to think that they might harmonise up to our level immediately but, over the next few years, their broad strategy ought to be to recognise the associated health problems. A French person’s lungs are as likely as those of an English person to be affected by the consumption of tobacco.
I expected a modest increase in duty beyond inflation. However, we can look at that again next year and assess the effect on smoking levels and tax yields of the duty rise and the ban on smoking in public places.

Brooks Newmark: I shall try to be brief and focus on the effectiveness of duty and its impact on the elasticity of demand and pricing.
We have heard already that we have the highest duties in the EU. As always, the hon. Member for Wolverhampton, South-West makes a very interesting point on tax harmonisation. However, a synthetic tax harmonisation is effectively occurring because of the impact of smuggling, which was mentioned by my hon. Friend the Member for Wycombe. Although in reality taxes are not coming down, the tax take may ultimately come down as prices increase. The tax take is becoming a synthetic tax harmonisation, and we need to be concerned about that.
My second point has to do with the analysis of elasticity of demand and pricing, which the Financial Secretary probably has in hand in one of the documents that he was waving about. Action on Smoking and Health has quite correctly pointed out that tobacco price rises are key in discouraging individuals from smoking, but the problem with price rises, as my hon. Friend said, is that they encourage more and more smuggling. I should like to focus, however, on that elasticity of demand.

Paul Goodman: Does my hon. Friend agree that it is also possible, if not likely, that there is a floor beyond which consumption cannot go? In other words, no matter how high taxes are raised, it is impossible to reduce consumption below a certain level, although no one can be sure what that level is. No matter how high Governments attempt to raise the tax, they cannot remove that floor. It also encourages smuggling, as he said.

Brooks Newmark: As always, my hon. Friend makes an excellent point. As a member of the Select Committee on Science and Technology, I know that there is an addictive element to smoking cigarettes. I believe that increasing prices will encourage those with extremely addictive personalities—or, I should say, those who are affected more strongly than others by cigarettes—to go to the black market to buy their cigarettes at a price below the market price effectively set by the Government. That will encourage a larger and larger black market to satisfy the needs of a core minority of people who need their tobacco fix. I am interested in what the Financial Secretary will have to say on the Government’s analysis. For every 1p increase in tobacco duties, what reduction do we see in consumption, at least down to the rock bottom mentioned by my hon. Friend? I am curious to hear a little more about that analysis.
As Imperial Tobacco has said, smuggling into the UK is the direct result of the differential in excise duties. We want to clamp down on that smuggling or prevent it from happening. Small shopkeepers in my constituency are no different from the shopkeepers of Leicester mentioned by my hon. Friend, or indeed from any of the 17,000 retailers in all the constituencies represented in this Committee. We must be sensitive to their interests.
Clearly, the health of the nation is paramount. As a non-smoker, like the previous two speakers, I want to discourage smoking as much as possible. However, we need to deal with the tension of duty increases and their effect on the black market and smuggling. I shall be interested to hear from the Financial Secretary what analysis the Government have done on the link between the reduction in smoking and the increase in the tax take. What numbers can he give us to show that the tax take is increasing, even with the inflation-linked increase in duty?

John Healey: Let me respond to the hon. Member for Wycombe (Mr. Goodman). I know Mr. Patel. I met him before the Budget and wished him well. He has recently taken over as chair of the Tobacco Alliance, and I discussed with him the Government’s interest in working with him and his network of small retailers to see how we can improve the public information that warns people about the dangers of counterfeit cigarettes and smuggled tobacco. Having published the Budget, we will do that work jointly with his organisation. As the hon. Gentleman said, small shopkeepers such as Mr. Patel are concerned, because cigarettes and tobacco bring into their shops people who then buy other things—the footfall, as Mr. Patel puts it. That trade is affected by the availability of illegal, smuggled tobacco. One of our principal reasons for giving such priority to the anti-smuggling strategy is that legitimate, honest businesses are undermined by the bootleggers and smugglers who make available cut-price cigarettes and tobacco.
Small retailers also face a number of other trends, not least the increasing range of retail products available at garages, and the patterns of shopping that, increasingly, take people to supermarkets and out-of-town centres, rather than to their local high streets and corner shops.

Paul Goodman: The hon. Gentleman is right. However, I just want to be sure that he acceptsMr. Patel’s key point, which is that there is a relationship between the rate of duty and smuggling.

John Healey: I shall come to that point. Thehon. Members for Ludlow and for Braintree(Mr. Newmark) both tried to probe the relationship between price—underpinned in part, but not entirely, by duty—patterns of smuggling and patterns of consumption. That is clearly complex, but I shall deal with it when I refer to the detailed modelling that the Government economic service has done.
In addition to the Tobacco Alliance, the hon. Member for Wycombe mentioned the Tobacco Manufacturers Association. We work closely with that organisation. Our analysis is that the illicit market trend is consistent, but the precise figures sometimes differ. The counterfeit figures—I am not sure whether they were the TMA’s—that the hon. Gentleman cited certainly differ, and we believe that the anti-fraud measures that we have put in place are making a great impact.
It is important to consider—as the hon. Gentleman encouraged us to do—the modest measure of retaining the real value of tobacco duty in clause 1 in the wider context of the anti-tobacco smuggling strategy, which we launched in 2000-01. Between then and 2003-04, we succeeded first in halting the rapid rise, then in stabilising it and then in beginning to reduce the illicit market. By 2003-04, the illicit market was still too big, but it was down to 16 per cent. Since the launch of the anti-tobacco smuggling strategy in March 2000, the number of cigarettes smuggled into this country each year has been reduced by more than 5 billion, and we have cut the illicit share of cigarettes by a quarter and protected almost £6 billion in revenue to the public purse. Without that action, and the investment that we have been prepared to put in, the illicit market would be not 16 per cent. but 36 per cent. We still have to do more to clamp down, because smuggling gangs change their tactics and their methods very rapidly. Part of what we have to do, and which we set out in the publication “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, published alongside the Budget, is to deal with the increasing levels of counterfeit cigarettes and the persistently high levels of smuggled hand-rolling tobacco.

Brooks Newmark: What analysis does the hon. Gentleman have that lies behind those projections, which show that the number would have been 36 per cent. as opposed to the 16 per cent.? What is the detailed analysis behind that differential?

John Healey: The hon. Gentleman brings me neatly to one of the documents that we published about18 months ago. I will send him a personal copy.

Dawn Primarolo: Signed.

John Healey: I am not sure that the hon. Gentleman wants me to do that. The publication is the most rigorous attempt to model and assess the often complex combination of inter-relationships in which the Committee is interested. It contains much of the information for which he and the hon. Members for Ludlow and for Wycombe have been asking. If the hon. Gentleman has time, I suggest that he study it.
The model’s main findings show that, with tobacco, we are close to the revenue maximisation point with cigarette duty. That means that any large real increase in duty rates would increase smuggling and start to reduce, not increase, revenues. Duty cuts wouldnot produce proportionate reductions in tobacco smuggling. Only a large cut in duty would be likely to have any significant impact on the behaviour of consumers and suppliers. The Government economic service tobacco model—this is the answer to one or two of the points that the hon. Gentleman has made—shows that a 1 per cent. real increase raises, in revenue terms, only about £5 million pounds.

Philip Dunne: I am most interested in what the hon. Gentleman is saying. If possible, may I receive a copy of the document? Will he look back at the historic impact of the real increases in the past and explain how effective they were in raising revenue versus the increased smuggling?

John Healey: I shall be delighted to ensure that the hon. Gentleman receives a copy. If any other Committee members would like a copy, it is available through the Vote Office.
According to our calculations, a 4 per cent. increase in duty would increase smuggling by about 1 per cent. It would have a negligible impact on consumption. The assessment suggests that it would hit consumption by 0.2 per cent. only. It would increase revenue by only about £10 million pounds and that is the point at which we would reach the revenue maximisation point on cigarette duty.

Brooks Newmark: I very much appreciate the analysis that the Financial Secretary has explained. However, there is a slight contradiction, or perhaps, if he could clear it up for me, it is not a contradiction after all. He said that a 1 per cent. increase in duties would increase tax take by £5 million pounds. However, he also said that there is a point of diminishing returns; that one cannot keep increasing duties ad infinitum. I am curious about the analysis in that document. What is the actual tipping point? Are we there now or do we need to increase duties by another 2 to 3 per cent.? Clarification would be helpful on where that tipping point is and the point at which we meet those diminishing returns?

John Healey: I do not want to repeat myself. Perhaps the hon. Gentleman did not catch my words when I said that we are very close to the revenue maximisation point on cigarette duty at present? Were we to increase the duty on cigarettes by 4 per cent., we would raise only an extra £10 million or so. We believe that that is the level at which we would hit the revenue maximisation point.
In his intervention and his contribution, the hon. Gentleman argued that our smuggling problem is principally a product of the fact that our tobacco duty rate is high compared with that of our European Union counterparts. I do not really wish to refer him to other documents, but if I did he would see that the vast majority of illegal cigarettes are smuggled into the UK in freight from outside the European Union. No duty is paid on those cigarettes anywhere, let alone in the European Union, so to concentrate on the difference in duty between Britain and Belgium, Spain or France is to miss the point. It is misleading as a focus for analysis. I am not sure whether the hon. Gentleman advocates cutting the duty in the UK to a rate that is comparable with those that prevail in the rest of the world, but his Front Benchers might be interested in that proposition financially—because it would cost billions of pounds—and in terms of health, because it would lead to an increase in smoking.

Brooks Newmark: On a point of clarification, I would never make any suggestion that would contradict my Front Bench, or the aspirations of my fellow Opposition Members.

John Healey: I think that we have heard the first public job application from the hon. Gentleman. I wish him well in supporting all the positions that his Front Bench takes during the course of these proceedings. If he does not disagree with the hon. Member for Wycombe, he certainly does with the hon. Member for Ludlow. While he was arguing that rates should be lower, the hon. Member for Ludlow said that the price of cigarettes and the duty on them should be higher. There is clearly an interesting discussion taking place behind the hon. Member for Wycombe. All hon. Members will be interested in the fact that the UK has long maintained high levels of duty so as to keep prices relatively high in order to try to affect consumption. Other countries in Europe, such as France, Germany and Ireland, are beginning—both for public health reasons and for revenue reasons—to follow our lead.
As part of his contention that we should increase tobacco duty in real terms, the hon. Member for Ludlow is rightly concerned, as all hon. Members will be, to bring about further reductions in smoking in this country. It has been the policy of successive previous Administrations and this one to use duty rates to maintain high cigarette and tobacco prices. That has undoubtedly been a significant factor in the reduction in the number of smokers in the population, which has dropped from 35 per cent. in the early 1980s to some 25 per cent. now.
As the proportion of the population who smoke reduces, further gains are harder to achieve. While duty rates were never low—they were never the single club in the policy bag—a number of other measures are needed. That is why I mentioned in my opening remarks that, through the NHS, we are making a large investment in programmes to help people who want to quit smoking. Hon. Members will be aware that 70 per cent. of smokers say that they would like to quit. The cessation programmes that we have put in place through the NHS are important in that respect. Given our experience in Ireland and Scotland, we believe that the ban in smoking in public places is likely to have a further impact on the overall level of smoking in this country.
I welcome the support of the hon. Memberfor South-East Cornwall (Mr. Breed) for the Government’s policy of a comprehensive smoking ban in public places. I am not sure that his hon. Friend the Member for Twickenham (Dr. Cable), as the Liberal Democrats’ shadow Chancellor, will be quite so keen, but he will certainly be interested in his approach to tax harmonisation.
Let me end by saying that any members of the Committee who believe that there is merit in any of the four new clauses should have a word with me and I shall undertake to let them have copies of all the documents that we have published recently that cover the relevant territory. Hon. Members may take that as a promise or a threat, but I hope that it will help them to come to the right decision when we finally vote on the new clauses, not just on whether clause 1 should stand part of the Bill.

Paul Goodman: As I explained earlier, the new clauses were primarily an attempt to elicit from the Financial Secretary an up-to-date summary of the effectiveness of tobacco duty. He has thoroughly outlined the Government’s thinking, particularly on the revenue maximisation point. It was useful to hear him explaining the Treasury’s position that there is a point beyond which, if the duty were raised, it would almost certainly not drive consumption down, but it would drive smuggling and counterfeiting up. He was also right to say that duties are only one club in the bag, albeit an important club, and to give us details.
We have been given two pointers. One is the point that was raised by the TMA that the Government might miss their smuggling target if present trends continue. The other relates to the Financial Secretary’s kind offer to shower us with documents. While, as I said earlier, the Government’s anti-smuggling strategy succeeded in reducing the revenue loss for two successive years from 2001, it rose again last year. I should be glad—goodness knows why I am exposing myself to more documents in this way—if the Financial Secretary would point me towards the sections of the document that explain clearly and straightforwardly why that occurred. We do not intend to oppose the proposed rise in duties and will not press the new clauses to a vote.

Edward O'Hara: Order. The new clauses have not yet been moved. At the appropriate time, the hon. Gentleman may decide not to move them.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Tobacco products duty: evasion

Paul Goodman: I beg to move amendment No. 10, in clause 2, page 2, line 13 [Vol I], after ‘who', insert
‘on a balance of probabilities'.

Edward O'Hara: With this it will be convenient to discuss the following amendments:
No. 11, in clause 2, page 2, line 16 [Vol I], after ‘likely', insert
‘on a balance of probabilities'.
No. 12, in clause 2, page 2, line 28 [Vol I], after ‘subsection (1)', insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 13, in clause 2, page 2, line 30 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 14, in clause 2, page 3, line 2 [Vol I], after ‘specified', insert ‘and reasonable'.
No. 15, in clause 2, page 3, line 28 [Vol I], after ‘may', insert
‘after seeking to establish the facts of the case with the manufacturer'.
No. 16, in clause 2, page 4, line 17 [Vol I], after ‘state', insert ‘fully'.
No. 17, in clause 2, page 4, line 27 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 18, in clause 2, page 4, line 28 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 19, in clause 2, page 4, line 46 [Vol I], leave out from ‘notice' to end of line 2 on page 5.
No. 20, in clause 2, page 5, line 4 [Vol I], leave out
‘(or are taken to have confirmed it)'.
No. 21, in clause 2, page 5, line 43 [Vol I], after ‘may', insert
‘after consulting the Commissioners, manufacturers and other interested parties'.

Paul Goodman: In introducing these amendments, I do not want to anticipate the clause stand part debate that will take place later. On the other hand, I have to say something about their context. The clause is important for this part of the Bill. In relation to the evasion of tobacco products duty, which we discussed in part a few moments ago, it sets out a series ofduties on manufacturers and penalties if they fail to comply with those duties, an appeals system and various supplementary provisions. The proposals are controversial. The Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Directors have reservations about them, and I shall explain later what those are. Before I do so, I want to go through the amendments in turn.
Amendment No. 10 refers to line 16 on page 2 of the Bill.

Edward O'Hara: Order. It is line 13.

Paul Goodman: I am grateful.
The amendment draws attention to the word “likely”. At present, the clause states:
“A manufacturer of cigarettes or hand-rolling tobacco shall so far as is reasonably practicable avoid—
(a) supplying cigarettes or hand-rolling tobacco to persons who are likely to smuggle them into the United Kingdom”.
I acknowledge that “likely” has been used in legislation, but it is the view at least of the Chartered Institute of Taxation that the word is a bit vague. We must remember that the assessment of likelihood will be made in due course by the commissioners, so it is important to be clear about the meaning of “likely”.
If I am not misrepresenting the position of the Chartered Institute of Taxation, it suggested that there are two interpretations of “likely”: one is a balance of probabilities, while the other is the alternative legal idea of beyond reasonable doubt. It is obviously important to be clear which meaning the Government have in mind. I take it that the Bill refers to likelihood on a balance of probability. If that were the Government’s view, it might be as well to write it into the Bill.
The Chartered Institute of Taxation said that the term “likely” is not absolute and could range from being likely on a balance of probabilities to beyond reasonable doubt. I will take its advice on the matter. When I read that, it occurred to me that something could be likely on a balance of probabilities and yet it had to be certain beyond reasonable doubt.
Rob Marrisrose—

Paul Goodman: I am happy to give way, not only to the hon. Gentleman but because he is a lawyer. He will probably cast some light on the matter.

Rob Marris: I advise the hon. Gentleman in contradiction to the Chartered Institute of Taxation that “likely” means on a balance of probabilities. It is a standard legislative word; it does not mean “beyond reasonable doubt”. That is a criminal definition.

Paul Goodman: I thought that the hon. Gentleman might say that. As I said a moment ago, I was struck by that when I read the Chartered Institute of Taxation’s document. However, if the Government’s meaning of “likely” is “on a balance of probabilities”, the Paymaster General should explain why she might or might not want to make that clear under the Bill.

Rob Marris: The Paymaster General does not need to take such action. The meaning is clear under the Bill and the word would be interpreted by a judge as meaning “on a balance of probabilities”. It is not a matter of ambiguity; there is no ambiguity. The word would be interpreted by a judge as the Chartered Institute of Taxation wishes it to be interpreted.

Paul Goodman: The hon. Gentleman might be right. If so, the Paymaster General will confirm that. There could be other interpretations of “likely” that I do not know about. It is even possible that the hon. Gentleman might not know of some interpretations of “likely”.

Jeremy Wright: I wish to explore the matter a little further. I am also a lawyer. I am not sure whether that is good enough, but I shall do my best. Does my hon. Friend agree that, if a tobacco manufacturer were to get the judgments wrong, he would face a potential penalty of up to£5 million? Is it not right therefore that as much certainty as can be drawn into the Bill is desirable?

Paul Goodman: As my hon. Friend said, he is also a lawyer. The hon. Member for Wolverhampton, South-West did not know what he was starting when he got to his feet. My hon. Friend is right, and I shall return to the size of the penalty in due course. It is extremely important to get that matter right.
We have explored thoroughly amendment No. 10 on the importance of defining “likely”. AmendmentNo. 11 seeks also to insert the words
“on a balance of probabilities”.
Amendment No. 12 refers to subsection (2)(b) which describes the “written policy” that a manufacturer will be obliged to keep for the purposes of describing what they are doing to ensure that they are not unwittingly participating in fraud. The manufacturer will have to keep that policy to satisfy the commissioners. M hon. Friends and I are seeking to insert after “subsection (1)” the words
“unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty’s Revenue and Customs.”
Evidently, keeping such a policy will impose a burden upon manufacturers. That burden might be justified—we shall have that discussion a little later—but it is reasonable in principle to establish a means by which that burden might be lightened a little. A memorandum of understanding would be a possible means not unknown to the Treasury.
In March, the Treasury and Her Majesty’s Revenue and Customs published a joint document entitled “New Responses to New Challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”. It acknowledged that the memorandum of understanding procedure, in which HMRC co-operates with UK tobacco producers rather than compelling them to act, has been a success. No doubt, the Financial Secretary wishes to draw our attention to that document. It states:
“MoUs between HMRC and the UK tobacco manufacturers have been an important element of the strategy, and have played a crucial role in restricting the availability of genuine cigarettes to smugglers. Since its peak in 2000/01, the incidence of UK manufactured cigarettes being smuggled into the UK has fallen markedly, from about 75 per cent of large seizures to 28 per cent in 2003/04.”
The Government were thereby acknowledging that those memorandums of understanding are an important element in their strategy.
It is true that in that document the Government ruled out using memorandums of understanding in the way that I have suggested. However, we feel that that decision has not been fully justified, although the Financial Secretary might attempt to do that in his reply. The main point of the amendment is to seek to establish whether a means can be found of lightening the considerable burden that will be placed on manufacturers if clause 2 comes into effect. Amendment No. 13 refers to the same policy and seeks to insert the same wording as amendment No. 12.
The Committee will be delighted to hear that we now turn to page three, where, on line 2, a requirement is placed on manufacturers. It states:
“The Commissioners may by notice in writing require a manufacturer of cigarettes or hand-rolling tobacco to provide, within a specified period of time, specified information”
contained in the three following subsections, which I shall not read out. The point is that the Bill says
“within a specified period of time”,
but there is no indication about how long that period will be. In effect, if manufacturers get a letter from the commissioners demanding that they fulfil their undertakings under the clause, they may, as far as I can see, be required to reply immediately; that might be the “specified period of time” referred to.

Stephen Hesford: When the hon. Gentleman was dealing with clause 1, it was not entirely clear whether he was sanguine about the concept of smuggling. Clause 2(5) gives effect to subsection (4), under which the commissioners are attempting to cut down smuggling. I see the hon. Gentleman nodding. The commissioners may want to act sooner rather than later, with little notice or some flexibility, because that would give more weight and effect to the function that they would ordinarily carry out under subsection (4). Inserting the word “reasonable” might hamper the commissioners. Does he accept that? In those circumstances, would he ask leave to withdraw his amendment?

Paul Goodman: Without repeating the debate on the previous clause, it is evident that my hon. Friends and I take smuggling seriously. Debating the level at which the duty is set in no way suggests that we are frivolous about it. However, I am grateful to the hon. Gentleman for bringing me to the next point that I wanted to make, which is about the word “reasonable”.
I think that the hon. Gentleman said that if “reasonable” were inserted, it might hamper the entirely laudable anti-fraud drive of the Treasury and the commissioners. If that is so, the Financial Secretary will doubtless give us adequate reason when he replies. However, just for argument’s sake, I cannot immediately see why inserting the words “and reasonable”, which would merely require the commissioners to be reasonable, would be a blow against the laudable, praiseworthy anti-smuggling efforts of the Treasury and the commissioners. I think that, with the assistance of the hon. Member for Wirral, West, I have covered that point.

David Gauke: If there is a particular need for information to be provided quickly, it would be reasonable for there to be a demand for it to provided quickly; if the demand was not reasonable, it could take longer. It depends on the circumstances, and I do not think that one should assess all the factors and circumstances. If there is a reasonable need for information to be provided promptly to enforce the measure, I see nothing in my hon. Friend’s amendment that would prevent that.

Paul Goodman: Well, these—[Interruption.] My hon. Friend the Member for Fareham has just whispered, “He’s a lawyer, too”, which the rest of the Committee should know.
My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) is right and as helpful as ever in making his point about reasonableness. The idea of reasonableness is not exactly foreign to Government Bills—whichever political party forms the Government—or foreign or extraneous to this Bill, which is full of clauses that use the word “reasonable” or the concept of reasonableness. I am attempting—I am sure that the Financial Secretary is attempting it too, and doubtless he will take up the point when he responds—to strike the right balance between the burden being placed on manufacturers, which raises important issues that we propose to discuss in the debate on clause stand part, and the Government’s anti-fraud drive. We must get that balance right.

Rob Marris: Will the hon. Gentleman give way?

Paul Goodman: I thought that I had finished, but I have not. I give way.

Rob Marris: I suggest again that the amendmentis redundant. We are talking about tobacco manufacturers, who usually have a lot of money. If they think that the Government have not acted reasonably, they can apply for judicial review under Wednesbury principles, and they will win.

Paul Goodman: It is wonderful that that will be tobacco manufacturers’ only recourse, considering all the time, trouble and difficulty that they would face in applying for judicial review. I am waiting to hear what the Financial Secretary has to say, but I suggest that the Government might want to find a means to ensure that the manufacturers would not have to go to that trouble in the first place.
Mr. Gaukerose—

Paul Goodman: I am sure that a sharp legal point will be whizzing my way and yours, Mr. O’Hara, any minute now.

David Gauke: I am not sure whether it will be a sharp legal point, but it is a legal point none the less. The Wednesbury judicial test of unreasonableness is a very high bar that is difficult and expensive to meet. The word “reasonable” in this situation will set a more realistic bar than the Wednesbury idea of unreasonableness.

Paul Goodman: I have to confess, Mr. O’Hara—I am sure that the hon. Member for Wolverhampton, South-West already knows this, although my hon. Friend might not—that I am not a lawyer. Naturally, I say that with some embarrassment.

Mark Francois: Some of his best friends are.

Paul Goodman: As my hon. Friend says, some of my best friends are. I do not know whether the hon. Member for Wolverhampton, South-West would automatically include himself among that number, but rather than explore that point, I shall return to concluding this section of my remarks. If the Financial Secretary believes that it is so unreasonable to insert the concept of reasonableness after the specified words in clause 2, he will say so. I shall listen to him with interest.
Subsection (1) of proposed new section 7B of the Tobacco Products Duty Act 1979 says that if “the commissioners think”—the word is not “believe” but “think”—
“that a manufacturer has without reasonable excuse”—
the word “reasonable” there was produced by Ministers rather than the official Opposition—
“failed to comply with the duty under section 7A(1)—
not to facilitate smuggling—
“they may give him written notice that they are considering requiring him to pay a penalty.”
In the interest of getting the balance right between the burden on manufacturers and the efficacy andefficiency of the Government’s anti-fraud drive, I ask the Financial Secretary whether, in the spirit of co-operation rather than confrontation, the commissioners can seek to establish the facts of the case with the manufacturer before winging out the written notice.
I move to line 17 on page 4. At present, the clause says that the penalty notice from the commissioners under proposed new section 7B(4)(a)
“must...state the grounds on which the Commissioners think that the manufacturer has failed to comply with the duty under section 7A(1)”—
the duty not to facilitate smuggling. We tabled amendment No. 16 in a probing spirit. It would insert the word “fully” after “state” to ensure that the manufacturer receives as full a letter as possible from the commissioners explaining how, in their view, the manufacturer has failed to comply. The Financial Secretary may argue that the concept of fullness is covered by the present form of words. If he does, I am sure that he will say so.
Amendment No. 17 refers to the concept of the memorandum of understanding, which is part of the Treasury’s practice, and seeks to include it in the Bill. The next amendment would do the same.
Amendment No. 19 refers to proposed new section 7C(3), which states:
“A manufacturer who is given a penalty notice may require the Commissioners to review the decision to issue the notice”.
However, the wording of subsection (3)(d) states that, if the commissioners have not varied or withdrawn the penalty within 45 days, they
“shall be taken to have confirmed the penalty”.
It is arguable that, should the commissioners seek to confirm the penalty, they should be obliged to do so, rather than it being assumed that they have done so. In that event, paragraph (d) should be deleted from the Bill. I look forward to the Financial Secretary’s response.
Amendment No. 20 refers to the same point. It would delete from subsection (4) the words:
“(or are taken to have confirmed it).”
I come now to the supplemental provisions. There is a tendency under such provisions to let the Executive branch of the Government have pretty wide sway. Proposed new section 7D(6) states:
“The Treasury may by order—
(a) amend the list”.
In other words, that is the list of matters to which the commissioners may have regard. Under the Bill, the Treasury may simply add, remove or amend at will entries in respect of that class of tobacco products, by order. The amendment would ensure that the Treasury consults commissioners, manufacturers and other interested parties before making what may, in effect, be sweeping changes to the lists of products.
The Financial Secretary might confirm that that is the Treasury’s proposal. However we seek that assurance from him. The purpose of the series of amendments is to strike the right balance between the burden on manufacturers and the effectiveness of the Government’s anti-fraud, anti-smuggling strategy. I look forward to hearing what the hon. Gentleman has to say.

Colin Breed: We must all agree that smuggling has been, continues to be and is likely to be a problem. However, an island nation like ours ought to be better placed than most in trying to prevent it from happening. The smuggling of cigarettes and alcoholic drink has become almost socially acceptable. It is unfortunate that many people do not see it as a great sin or breaking the law in any way.
Therefore, we have a situation in which, according to the notes, one in six cigarettes and half of all hand-rolling tobacco are smuggled. That in itself must cause us considerable concern. As, I think the Financial Secretary pointed out, much of that is large-scale smuggling in containers by organised criminal gangs who quite frankly are making huge profits—many millions of pounds. But those products are purchased by people. As we have seen recently, people are quite willing to buy materials in pubs that they do not question, but which might have been stolen. I suspect that there are considerable distribution networks that underlie those huge gangs. I do not know how they could distribute literally millions of cigarettes without clear distribution networks in this country in order to dispose of the smuggled material.
I shall return to my visit to Belgium to which I alluded earlier. I went there with a few other hon. Members to look at a particular operation set up purely to ensure that smuggled tobacco came into this country. We visited a warehouse just inside Belgium that was stacked to the gunwales with cigarettes and hand-rolling tobacco. Apparently it was restocked twice a week—a massive warehouse emptied out and refilled twice a week.
The proprietor seemed to use a cash system. I did not see anyone paying with cheques, credit cards or anything like that. He had a huge tea chest for a till which was full of £10, £20 and £50 notes and more in euros and other currencies. Next to it were standing two large gentlemen as a sort of insurance policy against someone taking the tea chest away.
We were invited to have a conversation with the owner, who, I imagined from his accent, was from London. He was quite open about what he was doing. I said, “Well, doesn’t anyone come to check?” He said, “We get checked probably every week. We are raided every week by the authorities. They come to check on what we are doing.” I asked if there were ever any problems and he said, “No, we adhere to all the regulations that we are required to meet, so we carry on.”
With four or five hon. Gentlemen in their suits parading around that place, a considerable number of cars came, slowed down, looked at us and then disappeared around the corner. So we were not invited to stay for long because it looked like we were having a bad effect on the owner’s trade. I asked him roughly how much cash went through his business in a year. He said, “I can be quite clear about that. Last year we tipped just over £100 million.” I asked what sort of profit margin that was and he said, “Easy. Between2 and 2.5 per cent.” I said, “So you make about£2.5 million in profit.” He said, “That’s about right.” Moreover, I would not have thought that his overheads would have amounted to a huge amount.
The owner made no bones about the fact that some people even had sports bags that carried precisely the amount of rolling tobacco that they considered could get through customs, which were then put in with others. They appeared to be returning tourists when they were actually day trippers. Sometimes such people would go over two or three times a week to do nothing other than pick up that sort of material and bring it back. I do not suppose that that has changed much. That might be considered small-scale, but while we were there at least 100 customers must have come along and picked up goods for cash. I cannot imagine that that was all for their own consumption.
So we have day trippers going not only on booze cruises, but on tobacco forays. Part of the problem is defining personal consumption. To me and other Committee members, it would be nil, but to others it could be 50, 60 or 100 a day. Many of my constituents, and perhaps others, have fallen foul of customs—even people who might have been quite innocent in their decision to get some cigarettes for their friends and themselves. We know of cases when even cars have been confiscated because customs have decided that people have gone over the limit. There was certainly not great clarity then about what could be imported and how it could be used. I hope that there is much better clarity now. Clearly, if the products are to be sold in this country, that is illegal. Most people understand that, but few people would decide not to purchase cigarettes, and rolling tobacco in particular, from people whom they knew had bought them without paying the duty.
As many members of the Committee have said, such action undermines our confectioners, tobacconists and newsagents who are under siege anyway. They are under siege because of supermarkets having taken their business; they are under siege because of newspaper wholesalers being difficult to them and they are under siege because of so much smuggled tobacco. That was pointed out by my local CTN who in one week sold only about 20 or so packs of rolling tobacco, but enough cigarette papers to roll about 5,000 or 6,000 cigarettes. He was for ever more having to order and sell cigarette papers, but did not sell too much of the rolling tobacco that was supposed to be put in them.
It is obvious that there are huge amounts of smuggled material. It is right that the Government should get the position under control. Perhaps the Minister or others may know about it, but I have not seen reports in my local papers of organised networks of distribution in this country that have been busted. No great effort has been made to close down some of the internal networks, but I hope that there will be in future. The manufacturers have an obligation to support such efforts. They make huge profits from tobacco products. We are moving away from memorandums of understanding to a more statutory obligation. We are trying to put more pressure on manufacturers. If that is so, a certain amount of clarity in respect of what the manufacturers need to do is required by tourists and day trippers to avoid penalties.
Will the Minister say whether the provisions cover small-scale smuggling? Will those who bring in small-scale amounts of cigarettes and rolling tobacco be caught more heavily under the Bill? Will it be made clear to them what the penalties will be? Will we make certain that constituents will not realise suddenly that they are infringing the law to the extent that they will be subject to huge penalties? Clause 2 refers continually to cigarettes.

Edward O'Hara: Order. I am listening carefully to the hon. Gentleman. He is slipping between speaking to the amendment and speaking to clause stand part. I have been generous with him so far, but I must say to him and others who wish to speak that we are not debating clause stand part, but these fine amendments.

Colin Breed: I am grateful to you, Mr. O’Hara. I am sorry for speaking in a wider context.
The amendments refer to specific parts of the clause, which refers only to cigarettes and hand-rolling tobacco. However, clause 1 refers also to cigars. I do not know whether there is a huge smuggling operation in cigars, but is the clause confined purely to those two products?

David Gauke: I hope to speak during the clause stand part debate, but I want to speak to amendmentsNos. 12, 13, 17 and 18, which refer to the memorandum of understanding mentioned by my hon. Friend the Member for Wycombe. He quoted from a document produced by the Treasury and HMRC, “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, which identified the important role played by co-operation between the industry and the Government. There seems to be no doubt that restricting the availability of genuine cigarettes to smugglers is crucial, too; that is an important part of Government policy, and that is to be welcomed.
One of my concerns about clause 2 is that there is no recognition of the role of co-operation with the industry and no reference to the memorandums of understanding—other than those in my hon. Friend’s amendments, of course. The purpose of amendments Nos. 12, 13, 17 and 18 is to put the memorandums on almost a statutory basis, or at least to create a role for them, so that there is a recognised role in legislation for co-operation between the Government and the industry. That is important because greater co-operation with the industry may continue to be essential in reducing smuggling.
We all wish to reduce the amount of smuggling, for obvious reasons, but industry co-operation has been essential to the success in doing so in recent years. I fear that as we move towards a statutory basis, industry involvement may diminish; there may be less incentive and less desire for the industry to assist the Government. I am concerned about that, and that is why I should be interested to hear the Financial Secretary’s views on where memorandums of understanding will lie following the implementation of the Finance Bill. Is there still a desire on the part of the Government to work with industry, and how could that be recognised in the Bill? Could the burdens on industry be not reduced, but made more suitable for them, so that there is a line of communication between Government and industry, and so that there are effective measures for tackling smuggling?

Philip Dunne: support the amendments tabled by my Front-Bench colleagues. In particular, I wish to speak on the amendments referred to by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), which have to do with the memorandum of understanding.
According to the document referred to, we have had some success in reducing the proportion of smuggled cigarettes manufactured in this country to 28 per cent. in 2003-04. That is obviously good news, but it means that 72 per cent. of smuggled cigarettes being sold in this country are manufactured overseas. My concern about the Government proposals thus far is how the measures will affect overseas manufacturers in practical terms. I shall be most interested to learn from the Minister how the Government expect to encourage manufacturers to comply with the regulations if we do not encourage them to co-operate with HMRC and the authorities in this country through means such as memorandums of understanding.
The wording in proposed new section 7A, referring to the likelihood of manufacturers’ customers smuggling into this country, is extremely vague and gives manufacturers a great deal of opportunity to argue that all their customers are bona fide. How on earth can HMRC, when prosecuting those manufacturers, prove that there was not bona fide intent? That would be extremely difficult, and that is why a memorandum of understanding can work through the arrangements between the manufacturer and the Revenue to provide proper enforcement. The other matter that arises, given that the clauses are directed at overseas manufacturers, is jurisdiction and territoriality. I am not an expert on that. Unlike others who have spoken, I am not a solicitor, and would have difficulty in interpreting this legislation alongside the legislation that might apply in jurisdictions under which non UK-based manufacturers are incorporated. Does the Minister appreciate the fact that memorandums of understanding with foreign-based companies might be the best way to overcome territorial and jurisdiction issues?

John Healey: It is difficult to debate the amendments without dealing with the broader context of the clause. Although the hon. Member for Wycombe did that very effectively, his hon. Friends ranged rather more widely. Some of the points that they raised were better suited to clause stand part.

Edward O'Hara: Order. The Minister has highlighted something that I have seen from the Chair—the difficulty of staying within the amendments while keeping clear of clause stand part. If the Committee will be happy, I shall move from the Chair that we combine the debate on the amendments with a clause stand part debate, in which hon. Members who have spoken may speak again. That should overcome the difficulty that a number of us have identified.

John Healey: I am grateful for that guidance,Mr. O’Hara. In that case, I shall have a bash at both. Let me start with the hon. Member for South-East Cornwall, who made a number of general comments, and gave us a vivid description of the retail warehouse that he visited in Belgium. I am curious to know—he might not wish to answer—whether he rang the customs confidential phone line when he came back. If he did not have the number, I shall happily supply it to him.

Colin Breed: I did better than that. We raised it in an Adjournment debate in Westminster Hall, in which all of those who went spoke.

Mark Francois: Was that designed to keep it confidential?

John Healey: The hon. Gentleman made a serious point, namely that those operations are highly organised and can be very profitable. Both the memorandums of understanding and the clause that we are debating are designed to ensure that we can clamp down further on sources of tobacco that might enter illegal or illicit supply chains. His comments, while vivid and relating to events two or three years ago, were pertinent to our discussion today.
The hon. Members for South-West Hertfordshire and for Ludlow wanted proper recognition of the role of memorandums of understanding, and of the co-operation that there has been with tobacco manufacturers in recent years. I shall come to that in detail. The hon. Member for South-West Hertfordshire mentioned the document that we published at the time of the Budget, “Reinforcing the Tackling Tobacco Smuggling Strategy”. That clearly points out how important close co-operation and voluntary memorandums of understanding can be in helping us to clamp down on sources of tobacco and cigarettes that have found their way into illegal and illicit supply chains in this country.

Jeremy Wright: Will the Minister accept that not including the memorandums of understanding specifically in these clauses and this new regime tends to indicate to manufacturers, if to nobody else, that the Government’s view is that the memorandums of understanding regime has not done the job properly? If he accepts that memorandums of understanding are important, is it not vital that they be specified in this clause?

John Healey: If the hon. Gentleman will allow me, I shall explain the position. If he feels that I have not dealt with it, he can respond. I do not think that he appreciates the fact that clause 2 mirrors the memorandum of understanding. Those of our UK manufacturers that have a memorandum of understanding in place will find it much easier to comply with the clause than those that do not. We want manufacturers that do not have one to be covered by the same regime, and clause 2 will ensure that they are.
Memorandums of understanding go beyond the provisions and purpose of clause 2. They cover issues that help us to work with the tobacco manufacturers to deal with counterfeit cigarettes, and they set out levels of co-operation that support other anti-smuggling strategies. Memorandums of understanding are important. They are the basis on which clause 2 is built. The clause mirrors the memorandums of understanding in many ways but does not replace them, because they play an important and much wider part in our anti-smuggling activities.
I shall deal with the comments of the hon. Member for Wycombe, amendment by amendment. The problems appear to have been raised more by tax advisers than by tobacco companies and the industry itself. He described the amendments as probing amendments. I hope that I can reassure him and other Committee members on the points.
Amendments Nos. 10 and 11 seek to introduce a defence for tobacco manufacturers, based on the balance of probability, against the accusation of facilitating smuggling. My hon. Friend the Member for Wolverhampton, South-West was right: the amendments are not necessary, as the conventional legal interpretation of “likely” is based on the balance of probability. The clarification proposed in amendments Nos. 10 and 11 is simply not necessary.
Amendments Nos. 12 and 13 seek to exempt tobacco manufacturers that have entered into memorandums of understanding with HMRC from the requirements to maintain and provide a written policy setting out their approach to controlling and monitoring their supply chains. Likewise, amendments Nos. 17 and 18 aim to remove the content of the supply chain policy and the manufacturer’s compliance with it from the list of factors taken into consideration when determining the amount of any penalty.
As I have said, the draft legislation is designed to mirror those memorandums of understanding. UK manufacturers with MOUs supply us with their documents already. Although a manufacturer might have agreed particular terms in an MOU, which might be helpful evidence of its willingness to comply, such agreements are voluntary. They do not provide any means of enforcement if a manufacturer does not adhere fully to the terms agreed.
An additional point worth making is that the clause as drafted will create equality of responsibility among tobacco manufacturers. In other words, it will ensure that those manufacturers that have entered into and complied fully with a memorandum of understanding are not disadvantaged. Providing exemptions on the strength of a memorandum of understanding would send the wrong signal to manufacturers, providing a potential incentive to enter into a voluntary agreement for the purposes of avoiding the clause’s obligations.
Amendment No. 14 refers to any notice given by HMRC to the manufacturer to provide within a reasonable period specified information about supplies of its brands to particular customers and markets. Such notifications will be made by HMRC where there is a particularly high risk of smuggling, and as a result manufacturers will be expected to exercise greater control over their supply chain policy.
It is a general principle of public law that HMRC must act reasonably. The addition of the word “reasonable” is therefore unnecessary, as it is implicit not just in the provision but in the clause as a whole.

Brooks Newmark: I have been perusing the explanatory notes. Paragraph 33 of the section that relates toclause 2 states:
“HMRC attach a large margin of error to estimates of profits tobacco manufacturers gain from this trade,”—
I assume that that refers to the illicit trade that we are discussing—
“but they estimate profits to be in the region of £33 million or £55 million, depending on different methodologies used.”
It would be helpful if the Minister clarified that that refers to the illegal or illicit trade that manufacturers enter—unbeknown to them, I assume. I am curious about why there is an almost 60 per cent., more than £20 million, difference between the sums.
The paragraph goes on to state:
“The UK tobacco manufacturers accept that they have a certain responsibility for ensuring that cigarettes and HRT, sold to markets outside the UK, are not supplied or re-supplied to persons likely to smuggle them into the UK. To this end a number of the UK tobacco manufacturers have agreed a Memorandum of Understanding...with the Commissioners of HMRC.”
Does that memorandum of understanding have any teeth that the Minister is aware of, or is that statement just generic? Will we have a debate in a year’s time and find out that £33 million to £55 million in illegal profits is still being made?

John Healey: The purpose of clause 2 is to giveteeth to the very provisions and approach of the memorandum of understanding. If the hon. Gentleman and other Conservatives were successful in blocking the progress of the clause, we might indeed return to this issue, next year or the year after, with little impact having been made on the profit margins that he cited from the explanatory notes.
Calculating anything connected with the operation of and margins in an illicit supply chain is inherently difficult. Such calculations involve the profits that can accrue to legitimate manufacturers producing and supplying genuine products that may, at a point down the supply chain, be diverted, avoid duty and be resold. That is not the profits that those manufacturers make on that activity, but the profits made on the products at source that may eventually find their way, according to our ability to calculate and estimate, into the illicit market. That is why there is inevitably a margin of error with such calculations. That is the nature ofhow the product is sourced and supplied, and the memorandum of understanding, reinforced byclause 2, is designed to try to choke off such illicit profits.

Brooks Newmark: The margin of error strikes me as rather large; we are talking about not 5 per cent. or10 per cent. but a more than 60 per cent. margin of error. That has perplexed me. Has the Minister done any analysis on how we could narrow that margin of error?

John Healey: We are able to improve our analysis; sometimes, doing that reduces the margin of error to the extent that we have good quality and improving information about the activities in the illicit field and the operation of the supply chain right back to the source—the legitimate manufacturers. Given that we are building up that work and that HMRC is sharing information with tobacco manufacturers about seizures, we are building up a better picture of the pattern of supply chains. With that picture, we can more effectively try to choke off such illicit activities, and ultimately we will be able to get a better measure of them.
I cannot give the hon. Gentleman any promises on reducing the margin of error, but I hope that I have explained the nature of the problem that we are trying to assess and calculate and why it is right to indicate that there will inevitably be a margin of error.

Brooks Newmark: I understood that, as the Minister correctly pointed out, the whole point of the memorandum of understanding was to give more teeth. I hope that the Minister can give me confidence that, if I am lucky enough to be on the Finance Bill Standing Committee one year from now and I refer to the explanatory note on clause 2, the margin of error will not be 60 per cent. and the numbers will be far smaller than those in this year’s explanatory notes.

John Healey: I hope that I, too, will be on the Standing Committee next year and still in the position that I hold now.

Rob Marris: Will my hon. Friend take the opportunity to explain to the hon. Member for Braintree that it is not a question of margin of error? As the explanatory notes say, different methodologies produce different results. That does not mean a margin of error. The hon. Gentleman does not seem to understand that.

John Healey: My hon. Friend is right. It is essentially a measure of margin of uncertainty.

Brooks Newmark: Let me clarify the point. Two or three questions ago I asked the Financial Secretary to clarify what the methodologies are.

Edward O'Hara: Order. It is not clear to me whether the Financial Secretary is taking that intervention.

John Healey: I give way to the hon. Gentleman.

Brooks Newmark: I apologise, Mr. O’Hara, and I thank the Financial Secretary for giving way. If the hon. Member for Wolverhampton, South-West had listened to my question two or three questions ago he would know that I asked what assumptions lie behind those methodologies that created such a large difference and how we can narrow them.

John Healey: I shall take this opportunity to return to the point that I was dealing with and the sensible questions asked by the hon. Member for Wycombe about the reasonableness of HMRC’s approach. That is important because the question of judicial review was raised by my hon. Friend the Member for Wolverhampton, South-West, who asked whether failure to provide information becomes a factor in issuing any penalty. The reasonableness of the request may be brought before a VAT and duties tribunal, which may then judge the matter. That may be a more available form of challenge and legal redress than judicial review.
The clause to which amendment No. 15 relates deals with the issuing of an initial notice to a tobacco manufacturer when HMRC believes that that manufacturer has failed to comply with its duty. The amendment would require HMRC to establish the facts of the case with the manufacturer before issuing any notice. Again, the amendment is unnecessary because such a requirement is implicit in the various factors that HMRC must consider before issuing a notice, the majority of which would benefit fromsome serious dialogue between HMRC and the manufacturer. The provision reflects the framework of sharing information and the ongoing dialogue based on the memorandums of understanding within which the clause has been created, and permits any manufacturer to place the facts of the matter before HMRC at any time prior to the issuing of a notice. It would not be in HMRC’s interests to issue a notice without trying to establish the facts first.
Amendment No. 16 would require HMRC to state fully the grounds for any penalty notice rather than just to state them. Again, it is clearly in HMRC’s interest to state the factors taken into consideration when issuing any penalty and any failure to do so is likely to be looked on unfavourably in any subsequent tribunal proceedings.
Amendments Nos. 19 and 20 deal with the provision for a departmental review of a penalty notice. That is an important stage in the safeguards for manufacturers and the way in which HMRC manages the process. The clause states that unless the manufacturer has been informed to the contrary within 45 days the penalty will stand. That decision may subsequently be contested at the VAT and duties tribunal. That is standard practice with excise duties and I am not sure that it would make much sense to try to make an exception in the clause. To do so would merely add uncertainty for those organisations and manufacturers involved in dealing with duty on tobacco products.
Amendment No. 21 would require consultation with commissioners, manufacturers and other interested parties prior to any amendments made by Treasury order. I shall say a couple of things that I hope will reassure the hon. Member for Wycombe, because we are discussing a proper concern about the process through which the Government go to legislate either by primary or secondary legislation, or by subsidiary guidance. As I think he knows, there are well established forums for HMRC and the Government to consult, and discuss with, manufacturers and other interested parties. They would be used before any amendments were made to the clause.
The hon. Gentleman might not be aware, although I have circulated copies to the Committee, that tobacco products amendment regulations have been circulated in draft, and manufacturers have received them. They are already the subject of discussions with those parties and they cover aspects such as the detailed operation of the scheme, the seizure thresholds and information to be provided on seized products. I hope that he will take that as an indication of our approach to the development of policy and of any legislation that may flow from the primary clause.
Before the scheme is implemented fully, we willprepare and issue guidance. Before and as we do so, we shall consult manufacturers about it. That process is also under way. I hope that I have given the hon. Gentleman sufficient explanation or assurance on the specific points that he was probing with hisamendments to encourage him not to press them to a Division. If he does so, I shall ask my hon. Friends to resist them.
The clause imposes a general duty on tobacco manufacturers to avoid, as far as possible, facilitating the smuggling into the UK of cigarettes or hand-rolling tobacco that they may have manufactured and distributed. The measure forms a central part of the reinforced strategy to tackle tobacco smuggling that was published on Budget day. By discussing the amendments, we have dealt with the operation of clause 2 in many respects. I stress that the legislation includes important safeguards to avoid the manufacturer being penalised unjustly for the actions of others or being penalised without having a chance to take steps to control better their supply chains. Such matters lie behind the hon. Gentleman’s amendments.
I have already talked about how the legislation and the memorandums of understanding encourage and foster a greater degree of dialogue between the tobacco manufacturers and HMRC. I would be delighted if HMRC never has to raise a penalty notice under the provisions of clause 2 and would regard the clause as being equally successful as I would if we had to do so. If HMRC were to raise a penalty notice, it would have to take into account a long list of factors, which would help to provide important checks and balances. As I have said, tobacco manufacturers will have a right to a departmental review of any decision to impose a penalty and the right of appeal to a VAT and duties tribunal if they are not satisfied with the results of the review.
I pay tribute to the level of co-operation that now exists with our leading manufacturers, through the memorandums of understanding with HMRC.Tim Lord, the chief executive of the Tobacco Manufacturers Association, said:
“This new MOU demonstrates the high level of co-operation that exists between HMRC and the tobacco companies in the UK. We hope that it will contribute to a further reduction in the level of smuggling and so curb the consequent damage to legitimate business”.
The reaction at Gallaher Group plc to the Budget strategy and the provisions in the Finance Bill typified that level of co-operation and the extent of the acceptance that we now need to reinforce the memorandums of understanding with legislation.Jeff Jeffery from Gallaher commented:
“We continue to support the Government’s initiatives to stop tobacco smuggling. The Government’s actions to reinforce its strategy for tackling tobacco smuggling will, we hope, result in further reductions in the illicit trade in tobacco and cigarettes.”
We have discussed the provision fully with those affected and will continue to do so as we develop the detail of the implementation process. I hope that the hon. Member for Wycombe will regard as satisfactory my specific comments on his amendments and not seek to press them, and that when we come to the clause stand part debate, he and his hon. Friends will actually support it.

Edward O'Hara: Perhaps it would be easier if I clarified the procedure that we are now following. The amendments have been proposed and in the course of the debate it became clear that it was difficult to isolate remarks on the amendments from the substance of the clause, so I incorporated the clause stand part debate into that on the amendments. The clause stand part debate may continue and references may be made to the amendments, although I hope that they will not be repetitious. At the end of the debate we shall dispose of the amendments and I shall put the question that the clause stand part without further debate.

George Young: It is a pleasure to serve under your chairmanship,Mr. O’Hara, and to return to the Standing Committee on the Finance Bill after a gap of some 10 years.
I welcome any measure that deals with smuggling and indeed any that deals with smoking. I happen to be opposed to both. I listened carefully to the Minister, but did not hear any estimate of the impact of clause 2 on the substantial evasion of revenue listed in the background notes—the figure of some £2.9 billion. That should be of interest to any Treasury Minister. I would like to know what the impact on that figure would be if the measures in clause 2 were implemented.
I have looked through the Red Book to see if it contains such an estimate. Under the heading “Budget Policy Decisions” is a section entitled “Protecting Tax Revenues”, which is what clause 2 does, but there is no estimate in that column of the impact of extending the use of the memorandum of understanding. Likewise, I looked at the text of the Red Book to see what will happen to tobacco revenues, but the only reference to a revenue forecast that I could find was on page 265, which states:
“The tobacco forecast includes an estimate of the impact of the smoking ban on consumption in enclosed workplaces”
which will reduce receipts. However, it does not say if clause 2 would increase receipts.
It would be helpful if the Minister could tell us by how much the £2.9 billion loss would be reduced if clause 2 were to stand part of the Bill. Listening to his remarks I can see that on the one hand revenue might increase because if access to illicit tobacco is eliminated and people have to buy through the tobacconist, there will be more revenue for the Treasury, but on the other hand, if overall demand is reduced and the manufacturers produce fewer cigarettes, there will of course be less revenue.
All I seek is an estimate of by how much the Treasury will benefit if the measures in clause 2, which seem entirely sensible, are adopted. By how much will the Treasury be better off? I am sure that the Treasury would not put such a clause before the Committee unless it had made some estimate of the benefit that would accrue to the public Exchequer.

Jeremy Wright: May I take this opportunity to say how pleased I, too, am to serve under your chairmanship, Mr. O’Hara?
I support the intention that the Government have demonstrated in clause 2 of cutting back on the smuggling of tobacco and increasing the revenue that the Exchequer can then retain, but I am concerned about the burden of obligations that will be placed on tobacco manufacturers. Will the Minister make it clear that those burdens have been thought through properly and that the language in the clause will assist tobacco manufacturers in knowing exactly what they have to do to comply?
It will be difficult for tobacco manufacturers or anyone else to moderate their behaviour to avoid someone else behaving in a criminal way, but that is what clause 2 expects of them. Under proposed section 7A of the Tobacco Products Duty Act 1979,
“A manufacturer of cigarettes or hand-rolling tobacco shall so far as is reasonably practicable avoid...supplying cigarettes to persons who are likely to smuggle them into the United Kingdom”
or
“supplying cigarettes...where the nature of the circumstances of the supply makes it likely that”
smuggling will take place.
We have broadly clarified the fact that the likelihood will be based on a balance of probabilities, whether or not it is stated in the Bill, but there remains the difficulty of what it is that a tobacco manufacturer can reasonably be expected to anticipate in the behaviour of the person to whom he is supplying the tobacco. That is a substantial difficulty. In the situation described by the hon. Member for South-East Cornwall—a large gentleman and a tea chest full of money—it is pretty clear that something illicit is about to happen. However, such situations are not faced by every tobacco manufacturer when supplying its product.
There should be some clarity about the circumstances in which tobacco manufacturers should look to understand their obligations. Some assistance is given under subsection (2) of proposed section 7A.

Stephen Hesford: The hon. Gentleman misleads himself. Subsection (2) of proposed section 7A sets out some of the things that the tobacco manufacturers will have to consider. As has been said, this is not a new thing. It is an ongoing process; we are including something in the Bill that is already in train. If a manufacturer knows that the market of a tobacco supplier who is buying huge quantities of tobacco is a tiny home market, it will be obvious that the tobacco is being sold elsewhere. I am not sure what point the hon. Gentleman is making.

Jeremy Wright: I suspect that the hon. Gentleman may have been a little too hasty in his intervention as I was about to deal with subsection (2). Indeed, I had started to do so.
I concede that there is some assistance for the tobacco manufacturer, but nowhere enough. Subsection (2) states:
“In particular, a manufacturer...in supplying cigarettes or hand-rolling tobacco to persons carrying on business...shall consider whether the size or nature of the supply suggests that the products may be required for smuggling into the United Kingdom”.
That is a helpful indication of the sorts of things that tobacco manufacturers might look for. Indeed, I go further. I concede that subsection (4) of proposed section 7A states:
“The Commissioners may notify a manufacturer in writing that they think the risk of smuggling into the United Kingdom is particularly great in relation to”
particular people, particular products or particular places.
The clause provides assistance. My concern is that it could have been phrased the other way around. Why should not the Government set out the sort of things that they want manufacturers to consider, giving a definitive list rather than simply imposing a general obligation on tobacco manufacturers to avoid getting into trouble with those who might be about to smuggle the goods that they had supplied? They could list specific things that tobacco manufacturers should avoid doing—specific ways to avoid entangling themselves—and if tobacco manufacturers failed in that, penalties should of course follow.
That broad obligation given in subsection (2) is not specific enough about what precisely a tobacco manufacturer should avoid doing. As has already been observed, the penalties for a tobacco manufacturer failing to comply with the obligations set out in the clause can be considerable. I ask the Minister to assist us by being a little more specific about why the Government chose the language of this clause and did not tighten it up.
Tobacco manufacturers are being asked to decide whether they believe it likely that products that they supply are likely to go on to be smuggled by others. That is a very subjective judgment. The Government require them to construct policy statements that say, “We considered the following things before we supplied our product to the potential smuggler.” Again, there does not seem to be any aspect of the clause that indicates how to measure whether that policy document is reasonable. What is to prevent the manufacturer from saying, “I have considered whether the person to whom I am supplying is likely to smuggle, and I believe that he is not likely to do so. That is my decision; I have written my policy document in those terms and therefore I have done what I need to do.” There does not seem to be enough specificity in the clause to make tobacco manufacturers clear about what they have to do.
Finally, the clause provides for an appeal to the VAT and duties tribunal. It is not clear—or at least as clear as I should like it to be—what the grounds for such appeals would be. Again, I ask the Minister to assist us by indicating in what ways appeals can be made, and the grounds for them.

Paul Goodman: It is also not clear from the clause whether the person who will hear the appeal is to be somebody other than the person who made the original judgment.

Jeremy Wright: My hon. Friend is entirely right. The clause provides for a review of the original penalty notice to be made by the commissioners, but it does not indicate that that review should be made by somebody other than the author of the original penalty notice, which would be desirable in the interests of justice. Again, the Minister may wish to assist us.

Rob Marris: I welcome you to the Chair,Mr. O’Hara, and thank the hon. Member for Wycombe for probing the wording of the Bill. In my experience, on occasion the wording of Bills is not as good as it should be. That is particularly important in the case of the Finance Bill, because it does not go to the other place, where it might be tidied up further. I know that my hon. Friend the Financial Secretary will think that I am being pedantic, but to demonstrate that we need to be careful about wording, I refer him to line 24 on page 2. That sets out the facts that are to be looked at by manufacturers as guidelines and, inter alia, says:
“shall consider whether the size or nature of the supply suggests”.
I invite my hon. Friend to introduce an amendment on Report to change the word size to quantity or amount, which is more elegant and more accurate.

Philip Dunne: I was disappointed that, in responding to the debate on the amendments, the Minister did not take the opportunity to pick up my points about territoriality. It is increasingly clear from this debate that the clause is directed primarily at UK-based manufacturers; the Financial Secretary quoted from their representatives at the beginning of the stand part debate. However, as has also been made clear by me and others, the bulk of the smuggling into this country is of cigarettes that have been manufactured outside this country. I urge the Financial Secretary to address how the clauses will work in practice against foreign-based firms. In that connection, has any form of regulatory impact assessment been undertaken on the impact of this sledgehammer approach on the UK firms that already co-operate thoroughly with the Government in seeking to reduce smuggling? It might be that, because this is my first Finance Bill, I am not aware of the necessity or otherwise for RIAs, which are usually made for non-financial Bills. It would be helpful if that could be clarified.
The hon. Member for Wirral, West illustrated very precisely the nature of the problem.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.